Effect of Cognitive Biases on Investment Decision Making: A Case of Pokhara Valley, Nepal

Abstract

Background: Behavioral finance deals with the study of psychological influences on investors and financial markets. Investors commonly perform investment analysis through fundamental and technical analysis. The behavior of the investment market originates from the principles of psychological decision-making that explains the reasons behind buying and selling stocks. 
 Objectives: This paper aims to examine the effect of cognitive biases on investment decisions in Pokhara Valley, Nepal. The effect of five cognitive biases, such as availability, anchoring, overconfidence, herd instinct, and regret aversion, is measured on rational investment decision-making. 
 Methods: This study is based on primary data sources using non-probability (convenience method) sampling techniques. There are seven brokerage houses in Pokhara valley, and researchers selected 179 respondents involved in stock market investment. Both descriptive and inferential analyses were made to analyze the data. 
 Results: The study discovers a link between irrationality in financial decision-making and availability, overconfidence, and herd instinct biases, but anchoring and regret aversion biases had no effect on irrational investment decisions. However, though all the biases have a positive relationship with an irrational investment decision, overconfidence bias has the highest impact. Regret aversion bias has the least impact on investment decisions in comparison to the other four biases. 
 Conclusion: The investors and the policymakers should focus on finding the cognitive biases and various de-biasing methods to eradicate those biases throughout investment decision-making. The findings of this study have a number of implications for investors, brokers, and governments who aim to stimulate stock market investment.

Impact of Cognitive Biases on Investment Decisions of Investors in Nepal

“…Anchoring Bias had the third highest impact on investment decisions. This contradicts the research by Dhungana et al (2022), which found that the effect of anchoring bias on investment decisions was statistically insignificant. However, the study by Dangol and Manandhar (2020) concluded that anchoring and adjustment factors significantly impacted the irrationality of investment decisions of Nepalese investors.…”

“…The research by Dhungana et al (2022) &Gyanwali and Neupane (2021) also found that herding bias had a statistically significant effect on the investment decision of Nepalese investors. Anchoring Bias had the third highest impact on investment decisions.…”

Behavioral Attributes Influencing Decision Making of Indian Derivative Market Investors

“…However, a considerable portion of these studies primarily focuses on the equity market. Therefore, there is a crucial and essential need to explore the influence of behavioral biases on derivative market investors in the Indian subcontinent [51][52][53][54][55][56][57][58].…”

Keputusan Investasi Cryptocurrency di Purwakarta: Mengungkap Dampak dari Herding dan Overconfidence

“…Penelitian lain menunjukkan bahwa overconfidence bias memiliki pengaruh positif terhadap keputusan investasi cryptocurrency (Setiawan, Y. C., Atahau, A. D. R., & Robiyanto, R., 2018). Namun, penelitian lain menunjukkan bahwa overconfidence bias dapat menyebabkan kerugian pada investasi (Sihotang, A. E., & Pertiwi, T. K., 2021;Dhungana, B. R., Bhandari, S., Ojha, D., & Sharma, L. K., 2022). Oleh karena itu, terdapat perbedaan hasil penelitian mengenai pengaruh overconfidence bias terhadap keputusan investasi cryptocurrency di Purwakarta.…”